What You Need To Know About Supplier Consolidation Strategies
November 4, 2016
While many OEMs do business with multiple suppliers, the best path to streamline production is minimizing your number of partners. You should only work with as many suppliers as necessary to meet your demand and metal manufacturing requirements.
A world-class OEM that spends $1 billion on metal fabrications may have more than 700 suppliers. However, half of the $1 billion may be spent on only 20 suppliers. If the company were to work with only 400 suppliers, the top 20 suppliers may start doing 70% of the work.
Different OEMs have varying strategies when it comes to managing supplier relationships, but most value lead times and the quality of their metal parts above everything else. If these are your goals, you can achieve them by working with a smaller number of top-performing contract manufacturers.
Essential Supplier Consolidation Benefits
Minimizing purchase orders is one area where you build your strength by consolidating suppliers. Many OEMs have different vendors for metal fabrication, industrial welding, custom machining, painting and assembly processes. If their metal parts require three of these services, OEMs can reduce their number of purchase orders threefold.
You also gain better control of your supplier relationships when you work with fewer metal manufacturing partners. If an issue arises, you’ll hear about it right away rather than having to dig through a pile of supplier communications. You know what’s going on at each metal manufacturer’s facility and have access to more complete information about the progress of all your projects.
Some problems are hard to avoid, even when you’re working with reliable suppliers. However, solving problems is easier when you can go directly to the source. Five vendors that manage five different metal manufacturing processes aren’t able to work together as well as one supplier’s internal team. You only need to speak with one point of contact to resolve an issue.
Supplier consolidation also empowers your contract manufacturers to stop competing against each other. Instead of worrying about how much business it’s going to get, each supplier focuses on solving bigger-picture issues, such as meeting your orders and helping you grow your business.
Key Steps Of A Supplier Consolidation Strategy
You can use these steps as a guideline for a successful supplier consolidation strategy:
1. Identify Who You View As Your Partners
You may decide to only work with suppliers that are getting the job done now. Or, you may continue relationships with some suppliers that have potential. Your partners should be aligned with your business objectives, understand the terms of your relationship and be willing to uphold their responsibilities.
2. Decide What Projects You’ll Give To Each Partner
Assign certain groups of parts to the appropriate groups of suppliers. The suppliers must agree to fill your requested orders. After you ensure your suppliers have the capacity, you should confirm that the pricing is right.
3. Transition Out Suppliers You Don’t Need
The best way to begin transitioning out suppliers is to start with the most difficult relationships. For example, if a high-priority part is complex and already three weeks past due, you may want to stop working with that part’s supplier first.
4. Clearly Communicate Project Specifications
You must ensure your prints are up to date when a partner takes on projects that a previous supplier used to handle. Sometimes, engineers forget to update a drawing when they ask suppliers to change a hole depth or location. Send your new supplier a sample of each part so it can verify there’s no disparity between your prints and what you actually need.
You may decide on a different avenue of supplier consolidation, but you should aim for an end result of better relationships, more trust and less overhead management.
Choose suppliers willing to invest in your growth. That means partnering with a new supplier that can help you meet business goals. With the right partners, you’re likely to see a dramatic shift in higher product quality and more profit opportunities. Contact Miller to schedule your consultation to see if we have the right solutions for your OEM business.